R&D accounting practice in Swedish public IT-groups

Abstract: Background: Companies applying the International Financial Reporting Standards (IFRS) in their accounting, e. g. all public groups in the European Union, face several items for assessment when accounting for their research and development expenses. Research expenses are to be treated directly as costs, but development expenses are to be capitalised as assets if they are assessed to meet certain requirements. These judgements affect the financial reports and the image conveyed to their users, such as investors.Purpose: The purpose of the study is to describe the development of R&D accounting practice in Swedish public IT-groups since the implementation of IFRS in 2005, and also discuss causes and consequences of said accounting practice. Demarcation: The study has been limited to Swedish groups listed in the IT-category of the Nasdaq OMX Stockholm stock exchange in April 2012. Groups that do not have any R&D expenses or have not applied the IFRS for five years or more have been excluded. Method: A combination of quantitative and qualitative research has been used. Quantitative data regarding the companies’ R&D expenses has been collected from annual reports and summarised in tables and charts. Then, a more qualitative approach has been applied to analyse and discuss the data, to try to find causes and consequences of the accounting practices. While analysing causes, we have studied four companies more deeply. Findings and conclusions: Our study indicates there is a large spread in R&D accounting practice in the Swedish IT-industry. Although the IFRS provides regulation on how to manage R&D expenses, companies apply these rules in very different ways. We also theorise that companies with a high equity ratio tend to use the immediate expensing method to avoid disclosure of information to competitors as they can afford it. In addition, we argue that the quality of the financial reports is reduced by the differing accounting practices, with comparability between companies being the main issue. Suggestions for further research: We would like to study closer if the familiarisation of the IFRS has led to a downgrade in comparability between companies and if a rule-based regulation on R&D would be better. We would also like to know how R&D accounting was applied in the IT-industry before the familiarisation of the IFRS and compare it to our study. Additionally, we would find it interesting to see how R&D is treated in other industries besides IT.